“The greatest rivers always find their way to the ocean. Like a ship reaching out to its motherland.”- Saleem Sharma
Like the above quote, many people who have left the Indian shores, long to return to their motherland, to spend, the later part of their life. Though the journey is easier than the decision to return, the transition to a new way of life is something that you would be distressed about. If you have spent considerable part of your life abroad, transitioning to life in India would be an uphill task, as you have to attune to, not only the lifestyle and the culture, but also understand India’s financial framework comprising tax laws, investment rules and regulations, the governing bodies, and the numerous financial institutions. To smoothen your transition, an intermediate tax status called RNOR status is applicable for you.
It takes time, to understand the banking system, the tax laws, investment options, and more importantly, the tax status of returning NRIs. When you are an NRI, you are eligible to open NRE/NRO/FCNR bank accounts, have a different set of regulations for investments, and a different set of rules to determine tax liability. However, on the return, you may qualify to be taxed as a resident, as soon as you complete more than 182 days of stay in India.
The short duration of 182 days may be tough for you to determine your income, move your assets and carry out efficient tax planning. Any miscalculated move may result in losses due to double taxation or due to a currency exchange or due to a higher rate of tax.
One of the measures, our government has taken, to smoothen the process for returning NRIs, is an intermediate tax status called – RNOR – Resident but Not Ordinarily Resident.
What is RNOR?
We are usually aware of the rules that govern Resident and Non-Resident tax status, but rarely get to understand, to whom the RNOR tax status applies to.
The Income Tax Act defines that any person who meets either of the two conditions mentioned below qualifies for RNOR status.
a. If you have been a non-resident/NRI, in nine out of ten previous financial years.
b. If you have spent less than 729 days in India, in the previous seven financial years.
c. If your taxable income in India exceeds Rs 15 lakhs and you have stayed in India for 120 days or more (but less than 182 days).
Depending on your date of return to India, you can benefit from this special tax status, for up to three assessment years.
To whom does RNOR apply?
RNOR is an “automatic” transitional status, given to NRIs when they return to India. On return to India, you come under RNOR status by default, and it need not be applied for. This unique transitional status helps you to enjoy the tax benefits applicable for NRIs, until the time you qualify for Resident status.
But does every NRI get to qualify as RNOR?
The conditions clearly imply that you should have spent at least 7 years abroad, to qualify for RNOR on return.
Going by the rules, any returning NRI who has spent more than 7 years abroad, will get to be in this transitional status for at least 2-3 assessment years. It would give you sufficient time, to move your foreign assets to India, without a heavy tax burden.
Why is RNOR “special”?
Once you return and qualify under RNOR status, you are exempted from paying taxes on any income earned abroad!
The following types of income are exempted from tax in India, under RNOR:
– Interest received on FCNR deposits.
– Capital gains made from the sale of assets held abroad, such as property.
– Interest or dividend received from deposits or securities held abroad.
– Any withdrawals made from retirement accounts held offshore.
– Income received as rented/mortgaged properties.
If you observe, except for salary, most other types of income are exempt from tax, and these exemptions will continue till you qualify as a Resident. Under RNOR, you can not only maintain the NRE/NRO/FCNR accounts but also open a “special” account known as RFC account (Resident Foreign Currency Account). The interest earned on these accounts ain’t taxable.
How does RNOR work?
Let us go, through some cases to understand how the RNOR status works. You must be already aware that the Indian tax year/financial year is from the April of the current year to the end of March of the succeeding year.
Case Study 1: Assume Mr Aditya returns to India on 20th Dec 2014, having spent 15 years in the US.
For the Financial Year (FY) 2014-15, he qualifies for RNOR status, as he satisfies one of the clauses of the RNOR status, i.e. being a non-resident for nine of out of the previous ten financial years.
For the FY 2015-16, he would still qualify for RNOR, even though he has spent more than 182 days in India. It is because, he satisfies the other clause of qualifying for RNOR status, i.e., having spent less than 729 days in India in the previous seven financial years.
For the FY 2016-17, his tax status would change to Resident as he would not satisfy either of the clauses of RNOR.
Case Study 2: Assume Mr Aditya returns to India on 20th April 2014, having spent 5 years in the US.
For the Financial Year (FY) 2014-15, he qualifies as a Resident for tax purpose, as he does not satisfy any of the clauses of RNOR status, and also has stayed in India for more than 182 days in a financial year.
Moving out of RNOR tax status
Your tax status will change to Resident on its own, the moment you don’t satisfy any of the two clauses defined for RNOR. When you become a resident for tax purpose, you will lose all the privileges that an NRI can get. You have to immediately inform your bank about it, and convert all your NRE/NRO accounts to Resident accounts. Henceforth, income earned abroad from all sources is taxed as foreign income.
If you intend to settle down in India permanently, it makes sense to move your offshore assets to India; within the period you are under RNOR status, to avoid high tax liability.
More about the RFC account
RFC accounts – Resident Foreign Currency Account can be opened by any person, who falls under RNOR tax status. You can bring back your foreign funds to India, and hold it in this account in any convertible currency of your choice.
It can be opened as Savings/Term Deposit accounts, and any existing NRE/NRO/FCNR accounts can also be converted to RFC accounts.
This account gives you a huge advantage, as you can not only hold and convert the currency, at better rates but also saves you the hassle of currency reconversion, in case you wish to move abroad again.
You can credit your funds in foreign accounts, employee benefits/superannuation received abroad, sale proceeds of assets like properties, securities, bonds, etc., and from any income earned abroad, in this account. The funds in this account can be used for any expenses abroad or in India, and also for remittance abroad.
The interest earned on this account, is not subject to tax, as long as you are in the RNOR status.
NRIs have multiple benefits doled out to them by the government, mainly due to their keen interest to invest in India. RNOR tax status is one such benefit, given to you so that you can move your assets from abroad to India, in a tax efficient manner. The additional privilege of RFC accounts, makes the transition easier, by enabling you to transfer and hold your funds, in a currency of your choice.